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Section 331(a) (1) of the Internal Revenue Code provides that a
complete liquidation of a corporation is to be treated by a shareholder
as a sale of his stock, and section 334(a) provides that a
shareholder's basis for property acquired on a liquidation is its
fair market value at the time of distribution. These long-established
rules led to the tax avoidance device known as the "collapsible corporation"
with which the Treasury Department has long been concerned.
In 1950, Congress enacted a provision designed to deal
with this form of tax avoidance, the predecessor of section 341 of
the Internal Revenue Code of 1954. This article will examine the
device known as the" collapsible corporation, " the manner in which
section 341 has been used to prevent the conversion of ordinary
income into capital gain, and the problems flowing from this provision.
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